Chinaza Onuzo: 5 things that keep power investors up at night (TS Playbook1)

The Power privatization process has reached the tail end. Bidders on 15 of the 17 assets have paid 25% of the purchase price for the assets, and are expected to pay 75% around September. There are expectations that this deadline may slip like the last one did, but by the end of the year the 75% should be paid.

Say you are an investor who has paid the 25% and are shopping around for the 75%, what are the five things that keep you up at night about the asset you are about to own, and the industry that you chose to invest in.

1. Transmission

Transmission is the big bottleneck in the system. According to the 2012 Report of the Presidential Task Force on Power, our transmission grid can only wheel 4,500MW from the various generation companies (Gencos) to the distribution companies (Discos). As we speak today there is about 7,000MW of installed generation capacity and about 7,500MW of distribution capacity in the various zones. As part of the requirements, both the Gencos and Discos are expected to significantly increase their capacity. So investors in both types of assets are worried that the Transmission Company of Nigeria (TCN) will not be up to the task of significantly increasing the size and reliability of the grid.

TCN is planning to raise $3.4 billion in debt to fund the expansion plans between now and 2016. Tony Elumelu, Chairman of Transcorp which is a Genco investor, is trying to play a Jedi mind trick on Nigerian banks. He’s gone on record to say that the Power Minister needs not to go abroad as the Nigerian banks have the capital to fund the entire raise. Go on Tony – “These are not the droids you are looking for.” If the local banks do fall for the Jedi mind trick then investors will sleep better at night. Investors believe that Manitoba can manage the expansion, but they don’t know if TCN can raise the funds for it to do so.

2. Gas Supply

Nigeria has tons and tons of gas reserves, and most of the power plants being planned in the near future in Nigeria are gas plants. The privatized Gencos rely on gas (three were concessions but those are hydro). In order for these Gencos to successfully upgrade their plants and deliver added power to the grid, they need increased supplies of gas. This isn’t a Genco only problem, after all if the Gencos can’t get gas, they can’t provide more power, and the Discos can’t sell more power – the beauty of an interconnected system.

There is enough gas in the ground to power the plants, however wells have to be drilled, gas stripping plants have to be built, pipelines have to be laid and all of this takes time and a bucket load of money. The FG is putting things in place to purportedly encourage the development of gas – better pricing, oil company domestic gas pricing, gas aggregators etc – however the worry is that this bit is very complex and could cause significant delays to the process.

3. Labour

Today, the Government says that they have agreed the N384 billion settlement package, tomorrow Labour says not so fast. Over 80% of the bid prices (I’ve seen estimates over 90% too) to be realised from the sale of the assets are going to be used to settle the obligations to labour. As far as I’m concerned this $2 odd billion is worth the price to get the privatization done. The risk here is that the government tries to renege on the agreement after hangover, or labour isn’t satisfied in the future, and chooses to try and disrupt the operations of the Gencos and Discos in the future.

4. Government Interference

The system today has been set up to run without much government interference. The few things in government hands – the Bulk Trader and TCN have been set up to run independently. NERC (the Regulator) has so far proven to be staffed with credible private sector players. However when the takeover commences, and the tariff increases and stealing conduits begin to disappear, the Government could interfere to score cheap political points. This affects the Discos more directly, but it bothers the Gencos too because weak Discos make bad clients. The agreements maintain that the Government will give you your money back plus a return if they do bad things, but will a government that is willing to do bad things be willing to honour that agreement. As they used to say, “you can’t fight city hall.”

5. Financing

Right now the investors in the Gencos and Discos are looking for the 75% to fund the balance of the acquisition funding. However they are going to need significant funds to carry out the capital expenditure plans they have promised as part of their bids. Estimates of this spend are $3 – $4 billion dollars over the next five years. Coupled with the $3.4 billion that TCN is looking for, the industry needs to attract $8 billion of funding in 5 years. Obviously some assets are more attractive than others, and will find it easier but there are very few assets that are a slam dunk. Especially since the potential investors also know about all these problems outlined above and may be hesitant to put their funds at risk.

Conclusion

There you have it: the five things that keep the Disco and Genco investors up at night. There are other problems obviously but these are the main ones. If you had a magic wand and solved all these things, it doesn’t mean that the Genco or Disco would automatically be successful, however it does mean that if is not successful it’s the investors fault.

Editor’s Note: This piece is one in the series of commissioned op-eds for TheScoop’s Playbook Chapter 1 (TS Playbook1) titled – Power for the People. It represents the opinion of the author.

If your answer to the question “What will you do with an English degree” is “enter Finance, obviously” then you have a pretty good idea of who Chinaza is. He found other people who thought that made sense, and so that’s what he’s been doing for almost a decade. When he’s not doing that, he’s mostly making a nuisance of himself talking about Nigerian policy, gender issues, and a host of random things that catch his fancy. Twitter: @IamSnazz